Serbia to Swear In Cabinet as Nation Edges Toward Crisis

Serbia’s new government is due to be
sworn in today with the dinar at a record low and one in four
Serbs out of work as the Balkan nation edges toward a financial
crisis and an economic recession.

Premier Ivica Dacic, a wartime spokesman of deceased
strongman Slobodan Milosevic, and his 19-member Cabinet will
take the oath of office at noon in Belgrade. Lawmakers debated
into the early hours this morning with opposition parties
warning the coalition mustn’t take the country back to the
1990s, when Dacic’s Socialists and President Tomislav Nikolic’s
Progressives served under Milosevic.

The four-party coalition, which has 140 seats in the 250-
member Parliament, is drawing up a plan to stave off bankruptcy
after the budget deficit widened to more than 7 percent of gross
domestic product at the end of March.

“We have the highest cost of capital, the most unstable
exchange rate and the lowest subsidies to agriculture,” Dacic
told lawmakers during the debate. He said he would stabilize the
currency, increase export incentives, curb the budget deficit by
the end of September and set up a council for economic recovery.

IMF Loan

The government comes to power after three months of
political wrangling. The International Monetary Fund suspended a
$1.3 billion precautionary-loan program in February amid
evidence the previous administration was slipping on budget and
debt targets as the economy lurched toward a recession and the
euro region’s crisis pushed up borrowing costs.

“Serbia needs an IMF program if it wants to maintain its
external liquidity,” Vladimir Gligorov, an economist at the
Vienna Institute for International Economic Studies, said by
phone July 23. “No Serbian government has faced up to the task
of slashing public and private spending. If they don’t do that,
the next thing you see is a Greek scenario. But Greece has the
European Central Bank to help and Serbia doesn’t.”

Finance minister-designate Mladjan Dinkic said yesterday
that he will meet the World Bank’s top official for the region
at the start of next week, adding that he will also
“immediately” invite the IMF for talks about Serbia’s public
finances.

Milosevic’s Party

Dacic’s Socialists are back in power for the first time
since the ousting of the party’s founder, Slobodan Milosevic,
who is blamed for fomenting the 1990s Balkan civil wars that
destroyed the economy. He has already declared banks “public
enemies,” a phrase Gligorov said “serves as preparation for
financial repression.”

Dacic’s plan to sack the central bank governor, Dejan Soskic, if he does not cooperate with the government, prompted
criticism the new Cabinet was destabilizing the dinar. Cedomir
Jovanovic, leader of the opposition Liberal Democratic Party,
warned the government it “must respect the independence of that
institution.”

“It is too soon to make definitive judgments about the
incoming government,” Kekic said. “Although there may already
be some cause for concern there are also reasons to believe that
the coalition’s bark will be worse than its bite.”

Closely Watched

The biggest party in the coalition, the Progressives will
be closely watched “from Brussels” and given that Serbia’s
economy and public finances are in “dire straits, the
government’s room for maneuver is very limited,” Kekic said.

Since May, the dinar has lost 5.9 percent against the euro,
the third-worst performance among 178 currencies tracked by
Bloomberg worldwide.

The central bank sold 24.5 million euros ($30.1 million)
yesterday to prop up the currency, helping it to erase intraday
losses of as much as 0.9 percent. The currency traded at
118.4336 per euro at 9:13 a.m. in Belgrade, or 0.17 percent up
on the day.

Serbia’s public debt rose to 52.1 percent of gross domestic
product in April. The IMF set a target of 4.25 percent of GDP
for the budget gap this year and 45 percent for debt.

Fiscal Consolidation

The new Cabinet is committed to fiscal consolidation,
resuming talks with the IMF and the World Bank, and faster
integration with the European Union, according to the text of
their coalition agreement. Austerity measures to be adopted by
September include tax and state-procurement overhauls, while
public wages and pensions won’t be reduced.

Dacic said the citizens won’t be expected to tighten their
belts and it will be up to the government to “help the people
survive the economic crisis as painlessly as possible.”

As the euro area slips toward a recession amid a flare-up
of the debt crisis, Serbia is fighting to keep its economy from
shrinking and service external debt that stood at 24.2 billion
euros at the end of May. The country needs to borrow $2.2
billion in the second half of the year to finance its budget and
repay debts to domestic and foreign creditors.

Key Challenges

“The key challenges ahead of the government continue to be
the medium- and long-term economic transformation of the Serbian
economy and recovery in growth,” Agata Urbanska, an economist
at the London-based HSBC Bank Plc, wrote in the July issue of
HSBC’s Global Research for the third quarter. “In the short
term, cooperation with the IMF and the EU will be key indicators
of the policy direction of the new government.”

The debt crisis has staunched exports from Serbia, with the
economy contracting 1.3 percent in the first quarter of 2012. It
has also boosted the current-account gap to about 17 percent of
GDP, while public debt exceeded 50 percent of economic output
and unemployment hit 25.5 percent.

“It would be good to ask the IMF for a new stand-by
arrangement” when the government completes a draft of the
revised 2012 budget, to allow for policy adjustments before
lawmakers adopt the new legislation, said Milojko Arsic, a
member of central bank’s Council of the Governor and chief
economist at the FREN economic research institute in Belgrade.

Policy Tool

Serbia is suffering from external imbalances, a low
investment rate, negative net savings, high unemployment and
industrial output equivalent to a third of what it was 23 years
ago, Miroslav Zdravkovic of the Belgrade-based Economics
Institute wrote July 22 for the Makroekonomija website.

Using the real depreciation of the dinar as the “main
monetary-policy tool,” along with unlimited foreign-exchange
purchases and a low policy rate at the central bank would help
reduce the imbalances, he said.

Serbia is already paying the price for ditching its IMF
loan program earlier this year. The cost of borrowing has risen
to 12.7 percent for the shortest three-month dinar-denominated
debt, while yields on its benchmark 10-year Eurobond maturing in
2021, stand at 7.02 percent.

“Yields of 6 or 7 percent mean that creditors do not
expect to be repaid in full,” Gligorov said. “An economy
growing at zero percent can’t afford such high interest rates,
which serve as insurance against future debt rescheduling or
forgiveness. Illiquidity in the economy is widespread and that
means there are expectations that some debts won’t be paid.”